September 2011: Legal Issues

September 2011

Legal Issues

Succession Planning

Failing to Plan is Planning to Fail

By Timothy R. Hughes, Esq. and Lauren K. Keenan, Esq.

Editor’s Note:This is part one of a two-part series.

Most subcontracting firms are closely held businesses owned by either a family or a small cadre of owners. Running the business generally overshadows thinking about the next generation of ownership. The reality is that failing to plan for ownership transition can destroy the business that owners are working so hard to build. In Part 1 of Succession Planning, we discuss why planning for ownership transition is critical for your business. In our next installment, we will discuss some of the key tools and concepts you need to understand, in order to accomplish a successful ownership transition.

Why engage in business succession planning?
Business succession planning is the ongoing process of planning for the inevitable change in leadership that takes place in any business over time. Owners need to identify and develop individuals who have the potential to fill key leadership positions within the company. A critical part of this effort is preparing for negative events such as the disability, illness or death of a key employee. Life events such as divorce, illness or disability, and retirement or death can happen suddenly and have a major impact on an existing business.

Without proper planning, these events can cripple a small or family-owned business. According to the Family Business Institute, only about 30 percent of family-owned businesses survive into the second generation, 12 percent still are viable into the third generation, and only about 3 percent of all family businesses operate into the fourth generation or beyond. The research further indicates that such business failures essentially can be traced to one factor: an unfortunate lack of family business succession planning.

The typical small business owner may think such planning and leadership development is more the realm of large Fortune 500 companies. While larger companies have larger pools of resources and employees from which to draw, planning is just as critical or even more so for the small business. The loss of a single key employee can be the death knell of a small business without proper planning, training and thought.

Recently, the discussion of business succession planning came front and center in the sports world when people started to ask what the owner of the Oakland Raider’s NFL Football Team (now 82 years old) planned to do with his majority interest in the team upon his death? Would a member of his family take over the team? Or would the team have to be sold? The questions are the same, no matter what the size of your business. And, like many things in life, the sooner you start to plan, the better.

Businesses that fail to plan not only run the risk of experiencing a void in strong leadership within the organization, but also are led to unnecessary monetary losses and avoidable tax liabilities. According to an article published by Bizjournals.com, estate taxes alone can claim between 18 percent and 55 percent of a taxable estate, frequently resulting in businesses having to liquidate or take on tremendous amounts of debt, just to stay afloat following an owner’s death.

Even with recent federal action with respect to estate taxes, small business transitions on death can result in high value transfers of ownership interests that can cause significant estate tax liability. Owners need to consider their liquid assets and whether they are sufficient to offset such taxes as part of estate planning and business succession planning. Timing can be critical, too, as many individuals forced to sell real estate in the last couple years can attest.

Addressing these issues fits into an intersection of multiple professionals. Your financial planner, your accountant, your lawyer and your insurance broker should be familiar with your situation and work as a team. Successful planning requires communication, cooperation and understanding from each member of your team.

Business succession planning is critical to the long-term health and viability of your operations. In our next installment, we will discuss some of the important tools and concepts that you should understand to accomplish your business transition goals.

Tim Hughes is a shareholder in the law firm of Bean, Kinney & Korman in Arlington, Va., and lead editor of the firm’s blog at www.valanduseconstructionlaw.com. He was named a 2010 “Leader in the Law” by Virginia Lawyer’s Weekly and a member of the Legal Elite for Construction Law by Virginia Business Magazine. He can be reached at thughes@beankinney.com or 703-525-4000.

Lauren Keenan is an associate in the law firm of Bean, Kinney & Korman. She can be reached at lkeenan@beankinney.com or 703-525-4000.

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